Amazon and Flipkart found violating Competition law in India-DG investigation report out
CCI penalizes Italian MRI machine manufacturer for abusing dominance in sale of specialized MRI G Scan machines to domestic diagnostic Center – Chairman CCI dissents on market definition.
The Competition Commission of India (CCI/Commission) vide its order dated 27.09.2018 has imposed penalty on Italian world leader in dedicated Magnetic Resonance Imaging (MRI), Esaote S.p.A and its Indian subsidiary , Esaote Asia Pacific Diagnostic Pvt. Ltd. for abusing its dominant position in sale of “Dedicated Standing/ Tilting MRI machines” under the brand name of G-Scan to the House of Diagnostics LLP, ( the “Informant” ) an Indian medical diagnostics and diagnostic imaging services LLP firm managing several diagnostic centres in India. The order was passed by a 2:1 majority with a strong dissent by the Chairman, Mr Sudhir Mital.
Brief facts
The investigation by Commission was directed based on the information filed by Informant which revealed that Esatoe S.p.A (OP 1) and Esaote Asia Pacific Diagnostic Pvt. Ltd. (OP 2) (collectively known as OP Group/Ops) abused their dominant position and indulged in anti-competitive conduct and thereby contravened the provisions of Section- 3 and Section 4 of the Competition Act, 2002 (the Act). The brief background of the case is as under.
The Informant is engaged in the business of medical diagnostics and diagnostic imaging services having multiple centers and serving patients and some charitable institutions at affordable rates. OP 1 is one of the leading manufacturers of medical diagnostic systems and is internationally acknowledged to be the world leader in dedicated Magnetic Resonance Imaging (MRI). It is selling ‘Dedicated Standing/ Tilting MRI machines’ under the brand name of G-Scan (now called ‘G-Scan Brio’) and exclusively holds the patent and know-how for the technology used in G-Scans. OP-2 is a subsidiary of OP-1 in India and deals exclusively with the machines manufactured by OP-1 including marketing and after-sale services in India.
The allegations raised by Informant are:
1.That pursuant to Purchase order dated 22.09.2011, OPs were to supply brand new machines to Informant, but the machines supplied by OPs to the Informant were not brand new rather they had already been manufactured and imported to India before the Purchase Order was signed, and these machines were having manufacturing and other defects. The image quality of the scans done on the said machines was also poor which resulted in incomplete MRI results and consequential loss to the Informant.
2.That as per the terms and conditions of Purchase Order, OPs had agreed to provide light weight “ Perforated See through Cage “(PTC) along with G-Scans for all the three sites of the Informant where G-Scans were to be installed, but OPs had refused to provide the same.
3. That OPs failed to provide ‘Head Coils’ for each of the G-Scan machines as agreed by them in the Purchase Order and thereby unilaterally altered the terms and conditions of the contract to the detriment of the Informant.
The Commission after considering the material on records and hearing the counsel of the parties opined that prima facie a case of abuse of dominance under Section 4 of the Act is made out (However no prima facie case for any anti-competitive agreement under section 3 of the Act , as was also alleged, was found) Accordingly, the Commission directed Director General (DG) to cause an investigation into the matter and submit the report.
DG’s Investigation
The DG identified the following three major issues:
- Whether ‘Dedicated Standing/ Tilting MRI’ machine is a distinct product, different from other diagnostic tools especially conventional MRI machine, and what is the ‘relevant market’ in this case?
While delineating the relevant market DG has examined the distinctiveness of the product in question and took opinion of various diagnostic centers, doctors and hospitals. The Dedicated MRI cannot be substituted with the convention MRI machines because conventional MRI machines are not capable of doing MRI in weight bearing position.
The DG also considered the scientific evidence based on literature and claim of the OP Group in their website claiming advantage of their G-Scan machines over conventional MRI machines. Thus DG concluded that that since the G-Scan MRI machine which is capable of scanning human body in weight bearing positions is not considered by its consumers i.e. diagnostic centers as interchangeable with conventional MRI machines, therefore, it can be said in light of the definition of the relevant product market given in Section 2(t) read with factors given in Section 19(7) of the Act i.e. like physical characteristics or end-use of the product, consumer preferences that the relevant product market in the instant case will be market for “Dedicated Standing/ Tilting MRI machines”.
- Whether the OP Group has a dominant position in the relevant market so delineated?
DG found that apart from OP the other two manufacturers of dedicated Standing/ Tilting MRI machines are Fonar Corporation Ltd. And Paramed Medical Systems Ltd., but these two do not operate in India. Therefore, OP is the sole manufacturer and supplier of dedicated Standing/ Tilting MRI machines in India and thus OP was in dominant position in the aforesaid relevant market.
- Whether the OP Group is abusing its dominant position in the relevant market and have thereby violated provisions of Section 4 of the Act? If yes, then: (a)Whether OP-2 has not acted as per the agreed terms of the sales contract and altered the terms & conditions of Sales Contract unilaterally to the detriment of the Informant?
DG while concluding that OP have abused its dominant position relied on the Purchase Order, Revenue Sharing Agreement entered between (Star) and OP Group and Comprehensive Maintenance Contract (CMC).DG concluded that OPs had unilaterally altered the agreed terms of the sale contract to the detriment of the Informant and refused to supply ‘Perforated See Through RF Cage’ and ‘Head Coils’ with each of the G-Scan Machine to the Informant and in process has made undue gains.
(b) Whether the OP Group has failed to provide the after sales service as per the Comprehensive Maintenance Contract (CMC) to the Informant, disregarding terms and conditions of the CMC and abused its position as sole service provider of the G-Scans (Dedicated Standing/ Tilting MRI machines) supplied to the Informant?
DG analyzed the Purchase Order and concluded that the OPs are acting on their own whims and fancies and arbitrarily demanding three times the price for CMC than the price of CMC originally agreed to. The DG also analyzed the e-mail exchanged between Dr. Amit Maniar and Mr. Massimo Guerra (Global Marketing Director of OP-1) & Mr. Dheeraj Nasa (National Sales Director, Esaote Asia Pacific Diagnostics Pvt. Ltd. ) and statement submitted by OSL Healthcare Pvt Ltd., the investigation concluded that OP-2 has exploited and abused its dominant position in the area of providing after sales services.
(c) Whether by not allowing third parties as service providers, OP-1 has limited the entry of competitors in the market?
On basis of ‘Distribution Agreement’ dated 09.02.2011 and the submissions dated 30.10.2017 made by OPs, the investigation concluded that OP-1 has entered into an agreement with OP-2 which gave exclusive rights to OP-2 for supply of spare parts and to provide after sales services to the consumers of the G-Scan MRI machines. The Informant had alleged that OP Group after selling the machines to Informant had entered into a Revenue Sharing Agreement (Agreement), wherein G-Scan machine would be supplied to Star “free of cost” an also “free maintenance cost”. The Informant alleged through such an Agreement, OP Group is competing with the Informant by providing the services of MRI scans in weight bearing positions to patients which the Informant was providing after purchasing the same machine from the OP Group. DG after analyzing the terms and conditions contained in the Agreement found that the MoU was emerged between Star and OP-2 to facilitate the recovery of the outstanding amount in respect of G-Scan machine sold by OP-2 to Star. DG noted discriminatory behavior of OP Group on generous after-sales service agreement offered by the OP Group to Star in comparison to very poor and overpriced after sales service provided to the Informant. Also, OP guaranteed 95% uptime of G-Scan MRI machine installed with Star without any additional charges and for any downtime greater than 5%, OP 2 had agreed to compensate Star by Rs. 7000/- per day for downtime. DG found OP Group indulging in discriminatory market practices and therefore, concluded that that such conduct is clearly discriminatory and is violative of the provisions of Section 4(2)(a)(i) of the Act.
Further after analyzing the agreement entered between Star Imaging and Path Lab (P) Ltd. (Star) and the OPs, the DG found that the allegation of the Informant that OPs had utilized their dominant position in one relevant market to enter into another market by entering into revenue sharing agreement with Star was not correct.
Commission’s Analysis
The Commission after considering DG’s Report and objections raised by OPs proceeded with the case and made the below mentioned analysis.
- Relevant Market:
The Commission after duly examining DG Report and objections raised by OP, observed that this case pertains to G-Scan/ dedicated standing/ tilting MRI machine which is capable of scanning the body of a person in weight bearing position. The DG has rightly pointed out that this device is unique in itself as it is meant for some specific portion of the body and for this very reason it is termed as dedicated standing/ tilting MRI machine.
On the issue of relevant geographical market, the Commission observed that the potential consumers of G-Scan are scattered in different parts of the country and the seller of these machines has the distribution network and infrastructure not only to sell and supply the Dedicated Standing/ Tilting MRI in entire India but also to provide after sales service, spare parts and other support. This makes the relevant geographic market in the instant case as the whole of India.
Therefore, Commission observed that the relevant market in the instant case is “market for dedicated Standing/ Tilting MRI machines in India”.
- Dominant Position:
The Commission noted that OP-2 is 100% subsidiary of OP-1 through Esaote International N.V., the absence of the other two players who manufacture such machine in India market, offers OPs an opportunity to operate independently of competitive forces.
Accordingly, the Commission held that the OP Group commands a virtual monopoly i.e. 100% market share in the market for dedicated standing/ tilting MRI Machines in India.
- Abuse of Dominant Position
On the issue of abuse of dominant position let us discuss the sub-issues separately as framed by the DG.
- Failure to supply brand new and defect free G-Scan Machine
The Commission examined the Purchase Order and found that the Informant had ordered three new G-Scan machines. It was evident that two G-Scan machines were invoiced in the name of OP-2 by OP-1 on 20.09.2011 and were packed and ready for dispatch on 15.09.2011 itself as can be seen from packing and weight lists dated 15.09.2011 having dispatch numbers 502108 and 502109 respectively issued by OP-1 in favor of OP-2 for two G-Scan Machines i.e. the two G-Scan MRI machines were ready and packed one week before the Purchase Order dated 22.09.2011 which shows that the OP Group had supplied the G-Scan machines to the Informant which were not brand new and were not manufactured as mentioned in the Purchase Order. Further, it is also observed that the third G-Scan MRI machine was also invoiced in the name of OP-2 by OP-1 on 30.09.2011 and was packed and ready for dispatch by OP-1 from Italy on 30.09.2011 itself as per packing and weight list issued in favour of OP-2 by OP-1 having dispatch number 502274 i.e. within one week of the signing of the Purchase Order.
Therefore, from the Invoice and Packing & Dispatch list it was evident that the three G-Scan machines were manufactured before placing of the Purchase Order by Informant. Further, the G-Scan MRI machines could not, by any chance, have been packed on 15.09.2011 & 30.09.2011 especially when it takes minimum 12 weeks to manufacture one new G-Scan MRI machine as informed by Mr. Massimo Guerra, Global Marketing Director of OP-1 during investigation.
- Unilaterally altered agreed terms of the sale contract
The Informant submitted, and the DG found that OP Group had expressly agreed to provide state-of-the-art light weight PTC but by refusing to supply the same OP has abused its dominant position and has acted in contravention of the provision of section- 4 (2) (a) (i) of the Act. Further, OP Group imposed unfair prices on the Informant by supplying lesser priced opaque cage in place of ‘See Through Perforated RF Cage’ and thereby further violated Section 4(2)(a)(ii) of the Act.
The Commission observed that the normally the G-Scan machined did not include Head Coil, but OP had agreed to supply Head Coil by mentioning it in Special Terms of the contract. The Special Term stated that Head Coil would be supplied on mutual agreement, but the usage of word “shall” in it, approved the fact that Head Coil should be supplied. Accordingly, the Commission held that the OP Group acted unfairly and thereby abused its dominant position by refusing to provide Head Coils with the machines to the Informant in contravention of the provisions of Section 4(2)(a)(i) of the Act.
Further, as informed by Informant that OP had unilaterally changed the prices of CMC in respect of G-Scan Machines from 6.5 lakh per year for three G-Scan machines to 6.5 lakh for each machine from 6th year to 10th year of installation of the machine. DG found that OP acted contrarily to CMC and demanded three times the price for CMC than the price which was original agreed to. The Commission affirmed DG’s finding and held that such conduct clearly shows abusive conduct of OP and contravenes the provision of Sections 4(2)(b) & (c) of the Act
- Revenue Sharing Agreement
The Commission did not find any weight in Informant’s allegations that by virtue of the Revenue Sharing Agreement dated 01.11.2013, OP Group leveraged its dominant position in one relevant market of selling and servicing of G-Scans to enter into another relevant market of providing MRI scans in weight bearing positions to the patients in Delhi. The Commission also observed that there is no material to suggest that OP Group along with Star was using predatory pricing to kill competition in the market of weight bearing MRI scans.
The Commission found OP Group in contravention of the provisions of Section 4(2)(a)(i), 4(2)(a)(ii), 4(2)(b) and 4(2)(c) of the Act, by abusing its dominant position in the relevant market and imposed a penalty as per Section- 27 of the Act at 10 % of their average relevant turnover of the preceding three financial years arising out of sale of dedicated standing/ tilting MRI G-Scan machines in India. Accordingly, the Commission imposes a penalty of Rs. 9.33 lac on the OPs for the impugned conduct which has been found to be in contravention of the provisions of Section 4 of the Act.
Chairman’s Dissent:
The Chairman, CCI (Mr. Sudhir Mital), however, did not agree with the majority view of the Commission and findings of DG on delineating the relevant market as “market for standing/tilting MRI machines in India.”
While disagreeing with the majority view, the Chairman considered the market realities and technicalities associated with acquisition of diagnostic imaging equipment by the diagnostic centers and hospitals and made the following observations:
- While procuring a diagnostic imaging equipment hospital/clinic would consider various factors like needs of patients. However, for consumers e. hospitals or clinics, there is enough inter-changeability between different types of diagnostic equipment, particularly between different types of MRI machines as there is no single factor that determines the solution for which a consumer opts.
- Frequency of demand for a specific feature of a machine in the relevant patient population is likely to be an important factor shaping customer choice and there does not appear to be distinct demand for weight bearing MRI machines in India.
- There also does not appear to be sufficient literature and evidence to suggest that a separate relevant market exists for standing/ tilting weight bearing MRI scanners. The submission by OP that its open G-Scan standing/ tilting MRI machines face competitive constraints from other types of MRI machines, the Chairman observed that MRI machines may have a variety of different technological features relating to architecture, application, field strength, functionality, cost, space constraints and installation requirements; yet such technological features and functionalities do not make a separate product market and this is evident from the minuscule demand of such product.
- Further the weigh bearing function attributed to the G-Scan is no means a unique feature. All MRI machines can have weight bearing functionality with the aid of a compression device, which can be added at a fraction of the cost of a dedicated tilting MRI machine.
- There is low frequency of demand of the standing/ tilting MRI machines as OPs submitted that in 11 years of operation in India it has sold only 10 G-Scan. This clearly indicates that on an average not even one machine was sold annually. Even if we consider the fact that such MRI machines are dramatically different from the conventional machines, still these machines are not preferred by customers. The small size of the market indicates substitutability between the dedicated Standing/Tilting MRI machines and the other MRI machines. In such a scenario, it is difficult to construct a relevant market merely based on some additional technical characteristics.
- Considering that standing/ tilting MRI machines exists in a separate market, when analyzed from the factors such as a difference in price and physical/technical characteristics, this boundary gets blurred when viewed from the perspective of intended use. The difference between the two kinds of MRI machines, if any, is not reflected in the preferences revealed by the customers given that the sales volume of the Standing/Tilting MRI machines is abysmally low. The fluidity of the boundary between the “two distinct” relevant product markets as recognized by the majority is therefore nebulous as the demand is being satisfied by both kinds of MRI machines. Rather, the preference is heavily for conventional MRI machines. Hence, the issue of dominance and abuse doesn’t hold. Further, the market is too small to provide any incentive to monopolize and abuse the monopolistic power.
Finally, the Chairman held that the market cannot be narrowed to standing/ tilting MRI machines alone as any market delineation would have to necessarily include all MRI machines irrespective of some additional features or functionalities.
Therefore, according to the Chairman, OP Group cannot be said to enjoy any market power in the market for MRI machines in India and in the absence of dominance, the question of abuse of market power does not arise. Accordingly, the Chairman disagreed with the Majority Order and dismissed the information.
Comment
This case stands out because of total contrast in market definition between the majority and minority view of the Commission. Whereas, the majority has determined the market “narrow” by considering the unique features of the dedicated Standing/ Tilting MRI machines as constituting a separate market by itself, the Chairman in his minority view defined the market broad i.e just the opposite i.e. the market for MRI machines, disregarding the unique features of the machines supplied by the OP group. However, it is surprising to note that neither the DG nor the Commission considered the necessity of using economic tools such as SSNIP Test to determine the relevant product market, which could have avoided the contrary orders within the Commission.
Further, noticeably, during the inquiry proceedings, apparently, some settlement was reached between the Informant and the OPs, and therefore, none of the counsels appeared on behalf of the Informant, yet the CCI continued with the inquiry proceedings. This reiterates the message that antitrust inquiries are non-withdraw able on the request of the parties since anti-competitive conduct affects the entire market and not just the specific market players.
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